Home price indexes are always delayed a couple months. But home price growth is important, so let's review it. Based on recent reports, it seems like yearly home price growth is bottoming. It is being helped by low rates and easy comps. However, I don’t think home price growth will reach the previous cycle high which was 6.5% in March 2018 (Case-Shiller). That’s because this increase in growth is tenuous at best. 

Rates are very low. High real economic growth or inflation can push rates higher. Recent geopolitical events have pushed rates lower which led to the unusual headline that an airstrike helped home buyers. However, that rally in treasuries was likely temporary. Once we get to the summer of 2020 reports, growth should stop rising because of tougher comps.

Obviously, comps and rates are only two parts of the picture. For upper income people, the stock market is important and for mid to lower income people, wages are important. Generally, people helped by the minimum wage increases won’t be buying homes, so only cyclical labor market fundamentals matter here.

5% FHFA Home Price Growth

The October FHFA home price index showed there was 5% yearly growth which is above 4.9% in September. The FHFA report usually shows higher growth than the Case-Shiller report. Looking at every facet of the 12 month moving average of wage growth, the only category with above 5% nominal wage growth is workers ages 16-24. They had 7.7% wage growth in October (8.4% in November). 

Unfortunately, most of those workers aren’t buying houses. Even at the trough of this cycle, every month housing became less affordable for almost all workers if you follow FHFA growth.

Monthly price growth was just 0.2% because it had a tough comp of 0.7%. Monthly growth ranged from -0.5% in the east north central to 0.7% in both the west north central and the east south central. Weak growth in the east north central was likely catalyzed by the GM strike as it was still going in October. 

Current national growth is above the compound annual rate since 1991 (3.6%), but below the rate since 2012 (5.9%). Only two regions had higher yearly growth than last year as the yearly national growth rate fell 1.1% to 5%.

Case-Shiller Growth Rate Also Improves

The Case-Shiller growth rate was up as well. Since its rate has been lower than the FHFA growth rate, for part of 2019 houses became more affordable because of prices and rates. Its growth bottomed at 3.2% in July and August. Median 12-month moving average of wage growth for all workers was 3.7% in July and August which means many subsets of workers were helped by the decline in home price growth, albeit for a short time.

In October, yearly national growth improved 11 basis points to 3.34%. That’s the 3rd straight month where yearly growth improved. However, in each month the two-year growth stack fell. Last October, growth fell 15 basis points to 5.3% which means the two-year stack fell about 4 basis points. Yearly growth is very likely to improve in the next few months because the comps will get much easier.

As you can see from the table below, once again, price growth was the highest in Phoenix. Its yearly growth was 5.8%. It’s inching closer to the all-time high it made 163 months ago. The only city with declining yearly prices was San Francisco which had growth of -0.4%. Once again, the 20-city average was below the national average as it was 2.2%. Since millennials are moving to cities, this helps them out.

Construction Spending

Interestingly, even though it looks like there will be an increase in residential construction in Q4, its positive contribution will likely be negatively counteracted by the decline in non-residential construction in the GDP report. That being said, as you can see from the chart below, in November construction spending growth was 4.1% which increased from 3.1% in October. The two-year growth stack fell though because the comp was 3% easier. Growth was negative from November 2018 to September 2019 because of the weak housing market.

In November, non-residential spending fell from $783 billion to $781 billion, but the yearly growth rate improved to 5.1%. That’s a 2.8% increase in growth which was more than counteracted by the 3.1% easier comp. Residential construction growth was 1.9% monthly and 2.7% yearly.  

Consumer Confidence Falls Slightly

December Conference Board consumer confidence index fell slightly unlike the University of Michigan report. The index fell from 126.8 to 126.5 which missed estimates for 130.2. Headline of the Conference Board report was “Consumer Spending Unlikely to Gain Momentum in Early 2020.” The consumer should be helped by the rise in the minimum wage in many states and the rise in the stock market. Personally, I’m still focused on how December was. I’ll be closely reviewing the retail sales and PCE reports.

Good news is the confidence index was upwardly revised in November. That slightly helps my thesis that holiday shopping growth was strong. Specifically, the Present Conditions index was up from 166.6 to 170, while the Expectations index fell from 100.3 to 97.4. A decline in expectations explains the headline. I care more about the present for this report since December is the biggest shopping month of the year.

47% of consumers said jobs were plentiful (up 3%) and 13.1% said jobs were hard to get (up 0.7%). That’s a net improvement of 2.3%. Expectations for the labor market got worse as 15.3% expect more jobs in the next 6 months (down 0.8%) and 14.9% expect fewer jobs (up 1.5%). That’s a net decline of 2.3%. 

Income prospects also got worse as the percentage expecting an improvement fell from 22.9% to 21.1% and those expecting a decline increased from 6.2% to 7.7%. That’s a net decline of 3.3%.

This report makes me slightly more optimistic about December retail sales, but it’s modestly disconcerting that consumers had worse expectations for the labor market and their income growth. 2019 was a good year for the consumer unlike manufacturing. I expect manufacturing to improve and the consumer to stay in good shape.